Investment in credit funds by French insurance companies

January 2014 | EXPERT BRIEFING | BANKING & FINANCE

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Credit funds are increasingly marketed to French insurance companies (entreprises d’assurance). Investments made by these companies are subject to restrictions due to specific prudential regimes applicable to them, when it is intended that such investments be admitted to represent their regulated commitments (engagements réglementés).

A number of substantial changes have been recently made to the rules governing such eligible investments for French insurance companies. In particular, a new category of eligible investment vehicles (the Fonds de Prêts à l’Economie) has been created, and other changes have been made in order to improve the investment opportunities for French insurance companies.

A Fonds de Prêts à l’Economie can take the form of either a French securitisation scheme or a French specialised professional investment fund. It is a vehicle which can invest in claims on and debt securities issued by local entities, public institutions or legal entities having for their main purpose commercial, industrial, agricultural or real estate business activities (excluding financial activities and collective investment schemes) and established within the European Union. Investments made by theFonds de Prêts à l’Economie structured as a French securitisation scheme must satisfy additional conditions regarding in particular their maturity and the date of their acquisition. The other main particularities of the regime applicable to the Fonds de Prêts à l’Economie relate to the derivative transactions they are authorised to enter into, the appointment of an asset manager and depositary, the reporting obligations of the asset manager and the characteristics of the bonds, units or shares they are authorised to issue (to be further detailed in a ministerial decree). Bonds, units or shares issued by a Fonds de Prêts à l’Economie do not need to be traded on a recognised market. The credit risk resulting from the holding of such bonds, units or shares cannot be divided into tranches.

Furthermore, bonds, units or shares issued by a French securitisation scheme whose assets only comprise loans granted to or guaranteed by the OECD Member States, local entities or public institutions, and real estate guaranteed loans granted to legal entities or individuals having their registered office or residence in an OECD Member State (as well as assets transferred to the securitisation scheme in relation to derivatives transactions or collateral arrangements and funds temporary available), have become eligible for investments by French insurance companies, provided that they comply with some but not all of the requirements applicable to theFonds de Prêts à l’Economie.

Generally, the question as to whether credit funds should be qualified as alternative investment funds subject to the EU Directive on alternative investment fund managers (AIFMD) is currently moot. Such qualification would allow credit funds to benefit from the opportunities offered by AIFMD but would also subject the fund to a number of constraints. This should be clarified shortly in France. A Fonds de Prêts à l’Economie structured as a specialised professional investment fund should be subject to the provisions of AIFMD as implemented in France. Conversely, a draft decree provides that the Fonds de Prêts à l’Economie structured as securitisation schemes, as well as the securitisation schemes referred to in the paragraph above, should be excluded from the scope of these provisions.

Other investment opportunities have been improved for French insurance companies.

In particular, the ability of French insurance companies to invest directly in loans has been broadened to include a new category of loans when: (i) the borrower is a legal entity of an EU Member State having for its main purpose commercial, industrial, agricultural or real estate business activities, excluding financial activities and collective investment schemes and having a sufficient credit quality; and (ii) the insurance company has obtained the relevant authorisation from the French banking regulator (Autorité de contrôle prudentiel et de résolution). Such authorisation is subject to the insurance company having set up a suitable credit risk analysis and measure system. The contents of such system and criteria of selection of the eligible loans will be further detailed in a ministerial decree. Authorising direct investments by insurance companies in loans to corporates is a further extension of the derogation from the French banking monopoly, granted in favour of French insurance companies.

Furthermore, the residual category of eligible investments which is comprised of shares, units and rights issued by commercial companies, and bonds, participative or subordinated notes issued by regulated insurance or mutual companies, has been clarified to include instruments issued by French securitisation schemes, when such instruments are not eligible investments pursuant to other categories (in particular, when such instruments are not traded on a recognised market and the issuer does not comply with the conditions newly set out for Fonds de Prêts à l’Economie).

Before the implementation of the changes detailed above, the investments of French insurance companies and other similar institutions in securities issued by credit funds raised a number of questions relating, without limitation, to: (i) the classification of these securities as bonds, which under French law must satisfy a number of criteria; (ii) the requirement that the securities be actually traded on a recognised market (as opposed to being simply admitted to trading on a recognised market) and the liquidity arrangements which may be put in place as an alternative; (iii) the extent to which a non-French fund can be considered as equivalent to a French securitisation scheme; and (iv) the extent to which a fund can be considered as a commercial company. Even though most of these questions remain unresolved further to the reform of the rules governing eligible investments of insurance companies, they are less relevant as far as French insurance companies intending to invest in French investment vehicles are concerned. Such questions remain of importance for other regulated institutions such as contingency institutions (institutions de prévoyance) and complementary pension institutions (institutions de retraite complémentaire) intending to invest in credit funds and for insurance companies intending to invest in non-French credit funds.

Finally, one should note that the regime governing the accounting treatment of investments made by French insurance companies has not been significantly amended. French insurance companies are likely to prefer investments which may benefit from the favourable accounting treatment set out in Article R. 332-19 of the French Code des assurances. In the context of credit funds, such treatment only applies to redeemable securities which are either traded on a recognised market, or assimilated to ‘BMTN’ when they comply with valuation, quotation and liquidity requirements, other than indexed bonds and units of securitisation schemes. Bonds, units or shares issued by Fonds de Prêts à l’Economie are not eligible for such favourable accounting treatment.

Hubert Blanc-Jouvan is a partner and Olga Goncharska is an associate at Ashurst LLP. Mr Blanc-Jouvan can be contacted on +33 1 53 53 53 97 or by email: hubert.blanc-jouvan@ashurst.com. Ms Goncharska can be contacted on +33 1 53 53 54 84 or by email: olga.goncharska@ashurst.com.